Economic data out of China continues to disappoint as inflation rate came in below expectations, this builds on the bad news earlier this week of sharp drop in imports. Also Fed Governor Tarullo in an interview to CNBC on Tuesday said that raising rates too soon will be more damaging that waiting too long and this along with weak economic data out of China have raised chances of U.S. Fed first rate hike expectation in Q1 2016, with the CME Group’s FedWatch, which follows markets expectations for monetary policy adjustments, now giving a 35% chance of a December rate hike. Next important data release for U.S. is retail sales, out at 1230 GMT on Wednesday, and we expect some short-term bounce for USD if the retail sales data comes in above expectations but any significant upside in the dollar is likely to be limited ahead of U.S. inflation rate on Thursday, which is expected to be negative 0.1%.

UK unemployment (Aug) rate has come in at 5.4%, below an expected 5.5%, pushing GBP higher. Although, claimant count for September has risen by 4600 compared to an expected drop of 2100, what looks promising is the robust average earnings numbers which came in at 2.8%. We see these putting inflationary pressures on the economy and markets shifting forward its expectations of a BoE first rate hike in 2017. From the Euro Area, industrial production numbers were poor, with a 0.9% rise seen in August compared to an expected 1.8% rise. We keep a close eye on EUR 5y5y forward inflation linked swap rate which has risen from its September lows of 1.57 but is now consolidating around 1.65. This is the benchmark rate ECB looks to form expectations of forward inflation and is now an important factor for expanding QE.

Rahul is an FX Strategist for the TraderMade Research team.Follow Rahul on Twitter to see his intra-day updates...Check out the TraderMade Research service...